ECO Animal Health Group plc (LON:EAH) has issued a positive trading update today following the conclusion of its financial year ended 31 March 2020.
· Strong financial performance in the year ended 31 March 2020
· Group revenue and EBITDA expected to be significantly ahead of market expectations
· Limited impact of COVID-19 on the Group to date
· ECO has started the new financial year strongly with continued strength in the Chinese and US markets
· Continued investment in new product pipeline in the second half
· Focus on conserving cash position
In December, we released our results for the six month period ended 30 September 2019 and we reported that the well publicised effects of the African Swine Fever (ASF) outbreak in China provided significant headwinds in our largest market. Furthermore, the China-USA trade tensions exacerbated the effect with US swine producers having limited ability to capitalise on the anticipated export market created by the pork shortage in China. This led to overproduction and depressed prices and margins in the USA. In our Interims, we reported on encouraging signs for the second half of the financial year with a reported reduction in the rate of new ASF outbreaks in China and an indication of some restocking of pig herds by certain high value producers, including some of our customers.
We are pleased to be able to report that these encouraging signs have resulted in a strong second half revenue performance in China and North America; in both cases H2 revenue was ahead of the prior year. Overall Group revenue for the year ended 31 March 2020 is expected to be ahead of the restated revenue for the year ended 31 March 2019 and significantly ahead of market expectations.
Gross margins in the Group have improved through the second half with stronger pricing in the USA leading to a recovery in gross margins in that market. The strong revenue performance and improving gross margins have delivered earnings before interest, tax, depreciation and amortisation significantly ahead of market expectations.
We have also continued to invest in our new product pipeline during the second half. An example of the positive effect of this innovation has been the recent announcement of the positive opinion from the European Medicines Agency for the use of Aivlosin® water soluble granules for the treatment and metaphylaxis of Mycoplasma hyopneumoniae in pigs. The European Commission is expected to issue a marketing authorisation within two months of the publication of the positive opinion.
COVID-19 Impact
To date, we are able to announce that the impact of COVID-19 on the Group has been limited. The Group’s transition to effective home-working has been smooth. All staff have been retained and ECO has not required assistance from any UK or US Government financial support schemes. The Group has an effective outsourced manufacturing model and the supply chain has, in most locations, adopted team shift working patterns to minimise personnel interactions. Additionally, ECO reaches its end customers through a number of stocking distributors. End users have adapted farm practices to protect workers and the industry appears to have continued in production albeit with some reduced capacity.
Despite the limited impact of COVID-19 to date we recognize that there is considerable uncertainty in the economic impact in the next 12 months; accordingly, we have taken steps to conserve cash. One of these steps is that the Board anticipates that it will not recommend the payment of a dividend for the year ended 31 March 2020. Despite these cash preservation measures the Group has and will continue to invest in its core R&D pipeline as a key driver for future growth. This investment is, however, at a reduced level during the first six months of the current financial year.
Current trading
ECO has started the new financial year strongly. The strength seen in the Chinese and US markets at the end of the year ended 31 March 2020 has continued into the first two months of the current financial year. This is also reflected in order books which provide good support for first half revenues.
The total Group net cash balance on 31 March 2020 was approximately £9.9 million. Of this, more than half was held in our 51% owned Chinese subsidiary from which we repatriate cash through an annual dividend declaration and around £1.7 million is held in our overseas operations in local currencies. In addition, the Group has an overdraft facility of £5 million which, on a net basis, was undrawn at the year end. Operating cashflow and cash balances since the year end have been in line with management’s expectations and consistent with the pattern of trading.
The Board and leadership team continue to monitor the future trading outlook to understand whether wider economic effects will have an impact on the prospects for ECO. The Board expects to publish its full year results during September 2020.
Marc Loomes, CEO said:
“We are delighted with the improved trading performance of the Group. ASF had a major impact on our business in China during the first half of this financial year but I am pleased with the recovery in that territory and progress elsewhere. We look forward to releasing our results during September subject to the ability of our auditors to perform their tasks in the current working environment. The effect of COVID-19 on our staff, business, customers, and supply chains is being well managed and we are cautiously optimistic that our industry outlook will remain robust. Furthermore, and like most businesses, we are looking after our cash position.”
